Cannibalization of Georgia city means credit risks for other municipalities

Local governments in Georgia face heightened credit risk and higher borrowing costs because of new state laws authorizing a city to be sliced in half to create a new municipality, analysts said this week.

Gov. Nathan Deal signed the bills May 8 allowing the de-annexation of 51% of Stockbridge’s assessable residential and commercial property value to pave the way for incorporating a new city of Eagle’s Landing.

Neither bill apportions Stockbridge’s outstanding, unrated debt, which would leave a smaller Stockbridge to pay all of the debt service if Eagle’s Landing residents vote to incorporate as a new city.

Diverting half of Stockbridge’s tax base without allocating the debt presents a “dangerous risk” for bondholders investing in general obligation bonds issued by Georgia's local governments, Matt Fabian, a partner at Municipal Market Analytics, said in Monday’s Weekly Outlook.

Stockbridge, Ga., City Hall opened in 2009 and was financed with revenue bonds.
City of Stockbridge, Ga.

“In a more conservatively spread bond market, borrowing for all Georgia local governments would rise sharply,” said Fabian. “In the current market, spreads may rise slightly for some issuers experiencing similar internal political frictions.”

The bills are credit negative for Stockbridge and local governments generally because they establish a precedent that the state can act to divide local tax bases, potentially lowering the credit quality of one city for the benefit of another, according to Moody’s Investors Service analyst Nisha Rajan.

“This legislation marks the first time that portions of a city are de-annexed in Georgia to create a new city,” Rajan said.

Stockbridge’s legal team will hold a press conference Thursday to announce legal action in response to the legislation signed by Deal. The city has hired three firms to examine litigation strategies.

City Attorney Mike Williams said the Moody’s assessment validates the city’s long-held position that the legislation could impact other local governments in Georgia.

“It also directly contradicts the governor's statement that this was merely a local issue,” Williams said. “It has and always has had statewide implications.”

Williams said that in addition to potentially increased borrowing costs because of the legislation, he is worried that some local governments in Georgia will find the bond validation process more difficult.

“How in the world will they show that their bonds are sound, feasible and reasonable if they cannot show that their borders will remain intact throughout the 20-, 30-, or 40-year life of their bonds?” he said.

Over the objections of Stockbridge city officials, Deal signed Senate Bill 262 amending the city’s boundaries and SB 263 authorizing a referendum on the incorporation of Eagle’s Landing in the November general election.

The de-annexation of Stockbridge to create Eagle's Landing is “ultimately a local issue and should not affect Georgia’s AAA rating,” Deal, who is term-limited out of office this year, said in a brief statement after signing.

Given the increasing number of annexation and de-annexation bills considered each year, Deal urged the Legislature to take up reform in the next session to ensure a “comprehensive, detailed and uniform process in the future.”

Deal did not explain what he found objectionable about the process.

Unless the bills are addressed by the courts or new legislation, Fabian said investors in Georgia municipal debt should be wary of - and be compensated for – “the risk that local governments can employ the equivalent of a ‘good bank/bad bank’ structure that isolates good assets in a newly created municipality and saddles the weakened entity with less valuable assets and the debt.

“The legislation undercuts the reliability of legally pledged security and enables the worst of intentions,” Fabian said. “This is representative, in our opinion, of the growing polarization within our country and a future of more diverse credit outcomes at the local level.”

Parts of Stockbridge, in Henry County, would be allocated to Eagle’s Landing in the de-annexation process. Though Stockbridge would gain a small amount of land from the unincorporated county, Rajan said the net effect still would be a notable decline in the tax base.

“The legislation undercuts the reliability of legally pledged security and enables the worst of intentions,” said Matt Fabian, partner at Municipal Market Analytics.

It would also leave Stockbridge with a smaller and less wealthy tax base, and could force the city to renegotiate contractual obligations, she said.

A smaller Stockbridge would be obligated to pay off about $13.02 million of privately placed Urban Redevelopment Agency lease-revenue bonds and $1.5 million of water and sewer notes issued through the Georgia Environmental Facilities Authority. Both have final maturities in 2031.

“With the de-annexation, Stockbridge's median family income would likely decline and be well below that of Eagle's Landing,” Rajan said.

According to the developer of Eagle’s Landing, which stretches across more than 3,500 acres in portions of Stockbridge and unincorporated Henry County, the new city would have much higher average income than Stockbridge.

J.T. Williams, who developed the community with his sons, told The Bond Buyer that household income is an average $128,000. He said that is twice as much as cities within the county and the county itself.

Henry County also faces uncertainty in the de-annexation process, according to Moody’s.

The county levies a voter-approved special purpose local option sales tax, called SPLOST, for the county and its municipalities to fund capital projects. In 2015, the county issued general obligation sales tax bonds rated Aa1 by Moody’s. About $23.4 million is outstanding.

County projects received 75% of bond proceeds and 25% went to the cities, with Stockbridge receiving the largest share at 10.7%.

“Although the $23.4 million in bonds were issued through Henry County and are not general or limited obligations of the cities, Stockbridge would be required to pay its share of debt service if SPLOST revenue is insufficient to pay annual debt service requirements,” Rajan said. “It is not clear how Stockbridge and, in turn, Henry County, would be affected if de-annexation proceeds and there is a shortfall.”